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VAT debts and time to pay arrangements

Contributed by Kreston
26 February, 2020

Whilst recently negotiating a time to pay arrangement for a client with temporary cash-flow difficulties, due to recent growth of the business, we discovered that HMRC are able in the following circumstances to ignore the incomplete payment of the next VAT return for Default Surcharge(DS) purposes.

DS is a penalty issued by HMRC to a VAT registered business that does not pay the full VAT due on a return within 37 days following the period end. We recommend that clients set up a direct debit with HMRC for their VAT return payments to minimise unfortunate delays due for example to lack of authorising directors or banking issues. The first DS default creates a warning letter, and if repeated within the next 12 months by a penalty of 2% of the unpaid amount. The DS rises to 5%, 10% and 15% for each of the subsequent underpaid VAT failures. Only the payment of twelve months of VAT returns on time removes the business from the DS cycle.

If the business telephones the HMRC Business Payment Support Service (BPSS) before the due payment date of the return, and obtains formal approval of a time to pay arrangement, the failure to pay this return does not count as a default. HMRC should be contacted by telephone 3 to 5 days before payment is due, but not earlier. This allows time for HMRC to gather information to enable them to consider the proposal, but also it is so close to the payment deadline that the business will be usually unable to gather new sources of funds.

Historically, businesses would partly pay the VAT due on the return and contact HMRC after the payment date passed, to seek a time to pay on the outstanding amount. This approach will generate either a DS penalty or a DS warning letter, which lasts for 12 months, so the advice to clients is to contact HMRC shortly before a VAT debt is created. This advice does not apply to debts caused by HMRC assessments, only for unpaid VAT returns.

Meera Rajah


James Cowper Kreston


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